Thousands of UK employees could see the value of their pensions slashed in half as a result of the tumbling stock markets, a group warned today.

Benefits consultancy William M Mercer said members of some company pension schemes could see “significant shortfalls” when they reach retirement.

The group said the shortfall would be caused by falling investment returns, lower annuity rates and increased life expectancy. But it added that many members of these schemes had no idea about the shortfall, and consequently were not taking any action to rectify it.

Under a defined contribution scheme an employer contributes a set amount to the pension fund but, unlike a final salary scheme, it does not guarantee the size of the final pension, leaving individuals to bear the risk of fluctuating stock markets.

Defined contribution schemes are becoming increasingly popular with employers and a number of companies, including British Telecom, have closed final salary schemes to new members.

The group calculated that a 30-year-old who joined a defined contribution scheme in 1991, contributing 10 per cent of their salary, would have a pension of 55 per cent of their final salary when they retired at 65. But a person who joined at the same age in 2001 and contributed the same proportion of their income would have a pension worth just 24 per cent of their final salary when they reached 65.

Jonathan Gainsford, European partner of William M Mercer, said: “I think it is worrying in the sense that many members of defined contribution schemes won’t have a clear understanding of what they can expect to receive when they retire.

“They need greater information to plan for it further, if people do not take averting action, then some people will be retiring relatively poorly off.”

He added that people should think now about increasing their contributions to their scheme, consider retiring later or even think about taking up a part-time job once they had retired.

The warning comes a day after actuaries Bacon & Woodrow said 17 pension schemes of FTSE 100 companies were under-funded by millions of pounds due to volatile stock markets.

Mr Gainsford said: “Pension shortfalls will hit members of defined contribution schemes particularly hard. In terms of low investment returns and annuity rates, they are very much on their own.

“Members of final salary schemes are better protected as they have guaranteed benefits – provided their scheme has enough money in it. It is their employer who normally bears the risk.”

The Government recently put back regulations requiring defined contribution pension plans to give members annual updates on what their estimated retirement income would be until April 2003.